CTI GROUP HOLDINGS INC - FORM 10-Q

CTI GROUP HOLDINGS INC - FORM 10-Q - November 14, 2012

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EXCEL - IDEA: XBRL DOCUMENT - CTI GROUP HOLDINGS INC	Financial_Report.xls
EX-32.2 - EX-32.2 - CTI GROUP HOLDINGS INC	d398061dex322.htm
EX-31.1 - EX-31.1 - CTI GROUP HOLDINGS INC	d398061dex311.htm
EX-32.1 - EX-32.1 - CTI GROUP HOLDINGS INC	d398061dex321.htm
EX-31.2 - EX-31.2 - CTI GROUP HOLDINGS INC	d398061dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-10560

CTI GROUP (HOLDINGS) INC.

(Exact name of registrant as specified in its charter)

DELAWARE

51-0308583

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

333 North Alabama Street, Suite 240, Indianapolis, IN 46204

(Address of principal executive offices) (Zip Code)

(317) 262-4666

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 1, 2012, the number of shares of Class A common stock, par value $.01 per share, outstanding was 29,178,271.

CTI GROUP (HOLDINGS) INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS


ITEM NO.	PAGE NO.
Forward Looking Statements		3

PART I – Financial Information
1. Financial Statements
Consolidated Balance Sheets at September 30, 2012 (unaudited) and December 31, 2011		4
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the nine months ended September 30, 2012 and September 30, 2011		5
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended September 30, 2012 and September 30, 2011		6
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2012 and September 30, 2011		7
Notes to Consolidated Financial Statements (unaudited)		8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
3. Quantitative and Qualitative Disclosures about Market Risk		28
4. Controls and Procedures		29

PART II – Other Information
1. Legal Proceedings		30
1A. Risk Factors		30
2. Unregistered Sales of Equity Securities and Use of Proceeds		31
3. Defaults Upon Senior Securities		31
4. Mine Safety Disclosures		31
5. Other Information		31
6. Exhibits		31
Signatures		32

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking” statements. Forward-looking statements discuss matters that are not historical facts. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or board of directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and (e) any statements using the words “anticipate”, “expect”, “may”, “project”, “intend”, “believe”, or similar expressions.

The Company’s ability to predict projected results or the effect of certain events on the Company’s operating results is inherently uncertain. Therefore, each reader of this Form 10-Q should carefully consider the risk factors stated in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, any or all of which have in the past and could in the future affect the ability of the Company to achieve its anticipated results and could cause actual results to differ materially from those discussed herein, including, but not limited to: economic conditions, risks associated with conducting business outside the U.S., ability to obtain a loan facility or receive additional advances from Fairford Holdings, Limited, a British Virgin Islands Company, who, as of September 30, 2012, owned beneficially 63.7% of the Company’s Class A common stock (“Fairford”), if needed, incurring additional losses, impact of accounting pronouncements, recording additional impairments, ability to maintain an effective system of internal controls over financial reporting and disclosure controls and procedures, ability to attract and retain customers to purchase the Company’s products, ability to develop or launch new software products, technological advances by third parties and competition, ability to protect the Company’s patented technology, and ability to obtain settlements in connection with its patent enforcement activities. You should not place any undue reliance on any forward-looking statements. Except to the extent required by law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions or circumstances or assumptions underlying such statements, or otherwise.

References herein to the Company mean CTI Group (Holdings) Inc. and its subsidiaries unless context otherwise requires.

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)


	September 30, 2012			December 31, 2011
ASSETS
Cash and cash equivalents	$	2,654,157		$	2,945,182
Trade accounts receivable, less allowance for doubtful accounts of $66,325 and $59,781, respectively		3,200,009			3,913,278
Prepaid expenses		587,336			568,701
Other current assets		299,132			414,058

Total current assets		6,740,634			7,841,219

Property, equipment, and software, net		1,896,762			1,923,216
Intangible assets, net		2,005,738			2,510,937
Goodwill		2,769,589			2,769,589
Other assets		78,587			78,808

Total assets	$	13,491,310		$	15,123,769

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	313,553		$	324,661
Accrued expenses		982,940			1,030,278
Accrued wages and other compensation		570,653			312,256
Income tax payable		514,639			591,631
Deferred tax liability – short term		117,620			29,241
Deferred revenue		3,908,943			4,399,765

Total current liabilities		6,408,348			6,687,832

Lease incentive – long term		30,337			74,275
Deferred revenue – long term		1,378,221			3,034,196
Deferred income tax liability – long term		460,179			602,422

Total liabilities		8,277,085			10,398,725

Commitments and contingencies

Stockholders’ equity
Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,178,271 issued at September 30, 2012 and at December 31, 2011		291,783			291,783
Additional paid-in capital		26,100,719			26,061,492
Accumulated deficit		(21,390,314	)		(21,939,266	)
Other comprehensive income – foreign currency translation		404,180			503,178
Treasury stock, 140,250 shares, at cost		(192,143	)		(192,143	)

Total stockholders’ equity		5,214,225			4,725,044

Total liabilities and stockholders’ equity	$	13,491,310		$	15,123,769

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)


	Nine months ended September 30,
	2012			2011
Revenues:
Software sales, service fee and license fee revenue	$	12,774,366		$	12,495,621

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		3,248,315			3,463,663
Selling, general and administration		5,273,879			6,268,093
Research and development		2,073,039			1,930,393
Depreciation and amortization		1,358,387			1,452,128

Total costs and expenses		11,953,620			13,114,277

Income / (loss) from operations		820,746			(618,656	)

Other (income) / expense
Interest (income) / expense		(6,230	)		23,886
Other expense / (income)		244			(994	)

Total other (income) / expense		(5,986	)		22,892

Income / (loss) before income taxes		826,732			(641,548	)

Tax expense		277,780			161,504

Net income / (loss)		548,952			(803,052	)

Other comprehensive income / (loss)
Foreign currency translation adjustment		(98,998	)		83,174

Comprehensive income / (loss)	$	449,954		$	(719,878	)

Basic and diluted net income / ( loss) per common share	$	0.02		$	(0.03	)

Basic weighted average common shares outstanding		29,038,021			29,038,021
Diluted weighted average common shares outstanding		29,875,663			29,038,021

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)


	Three months ended September 30,
	2012			2011
Revenues:
Software sales, service fee and license fee revenue	$	3,950,715		$	4,378,665

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		946,026			1,089,661
Selling, general and administration		1,653,245			2,324,525
Research and development		726,500			617,906
Depreciation and amortization		461,501			504,787

Total costs and expenses		3,787,272			4,536,879

Income / (loss) from operations		163,443			(158,214	)

Other (income) / expense
Interest (income) / expense		(207	)		4,100
Other (income) / expense		244			(994	)

Total other (income) / expense		37			3,106

Income / (loss) before income taxes		163,406			(161,320	)

Tax (benefit) / expense		(1,993	)		17,518

Net income / (loss)		165,399			(178,838	)

Other comprehensive income / (loss)
Foreign currency translation adjustment		(131,600	)		107,356

Comprehensive income / (loss)	$	33,799		$	(71,482	)

Basic and diluted net income / ( loss) per common share	$	0.01		$	(0.01	)

Basic weighted average common shares outstanding		29,038,021			29,038,021
Diluted weighted average common shares outstanding		29,871,566			29,038,021

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net income / (loss)	$	548,952		$	(803,052	)
Adjustments to reconcile net income / (loss) to net cash used in operating activities:
Depreciation and amortization		1,358,387			1,452,128
Provision for doubtful accounts		13,369			3,393
Deferred income taxes		(79,381	)		183,960
Recognition of rent incentive benefit		(18,850	)		(80,663	)
Stock option grant expense		39,227			28,909
Loss on disposal of property and equipment		244			421
Changes in operating assets and liabilities:
Trade receivables		828,661			(86,458	)
Note and settlement receivables		—			24,623
Prepaid expenses		(4,948	)		(279,364	)
Income taxes		(100,258	)		(230,147	)
Other assets		114,456			(191,198	)
Accounts payable		(21,677	)		(103,212	)
Accrued expenses		(106,808	)		68,546
Accrued wages and other compensation		251,342			350,783
Deferred revenue		(2,399,401	)		5,514,935

Cash provided by operating activities		423,315			5,853,604

Cash flows used in investing activities:
Additions to property, equipment, and software		(827,787	)		(1,264,433	)

Cash used in investing activities		(827,787	)		(1,264,433	)

Cash flows used in financing activities:
Repayments under credit agreements		—			(825,000	)
Advance from shareholder		—			838,509
Repayment of advance from shareholder		—			(1,343,525	)

Cash used in financing activities		—			(1,330,016	)

Effect of foreign currency exchange rates on cash and cash equivalents		113,447			(121,180	)

(Decrease) / increase in cash and cash equivalents		(291,025	)		3,137,975

Cash and cash equivalents, beginning of period		2,945,182			680,046

Cash and cash equivalents, end of period	$	2,654,157		$	3,818,021

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1: Business and Basis of Presentation

The Company designs, develops, markets and supports billing and data management software and services. The Company operates in two business segments: Electronic Invoice Management (“EIM”) and Call Accounting Management and Recording (“CAMRA”). The majority of the Company’s business is in Europe and North America.

The Company was originally incorporated in Pennsylvania in 1968 and reincorporated in the State of Delaware in 1988, pursuant to a merger of CTI into a wholly owned subsidiary formed as a Delaware corporation. In November 1995, the Company changed its name to CTI Group (Holdings) Inc.

EIM designs, develops and provides electronic invoice presentment and analysis software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. The Company provides these services primarily through facilities located in Indianapolis, Indiana and Blackburn, United Kingdom. CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase the CAMRA products when upgrading or acquiring a new enterprise communications platform.

The accompanying consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

Certain information in footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), has been condensed or omitted pursuant to the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2011 and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants, which the Company is required to follow.

Amortization expense of developed software, which relates to cost of sales, was presented as depreciation and amortization expense. Amortization expense of developed software which amounted to $564,319 and $658,466 for the nine months ended September 30, 2012 and 2011, respectively. Amortization expense of developed software amounted to $190,362 and $242,544 for the three months ended September 30, 2012 and 2011, respectively.

NOTE 2: Supplemental Schedule of Non-Cash Investing and Financing Activities

The Company paid $0 and $23,919 in interest related to the Company’s notes payable for the nine months ended September 30, 2012 and 2011, respectively.

The Company paid $182,000 and approximately $98,000 for current year tax estimates for the nine months ended September 30, 2012 and 2011, respectively. The Company paid income taxes of approximately $268,000 and $102,000 during the nine months ended September 30, 2012 and 2011, respectively, for taxes on prior year income.

NOTE 3: Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and other accruals approximate their fair values because of their nature and expected duration.

NOTE 4: Debt Obligations and Liquidity

The Company had the following debt obligations:

In October 2010, in order to supplement the Company’s liquidity, Fairford advanced $500,000 to the Company. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand.

On December 31, 2010, a revolving loan (the “Loan Agreement”) the Company had with PNC Bank (“PNC”) matured. The Loan Agreement allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. At December 31, 2010, the outstanding principal under the Loan Agreement amounted to $825,000. On January 3, 2011, in order to supplement the Company’s liquidity, Fairford advanced $825,000 to the Company which enabled the Company to repay the revolving loan facility with PNC. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of the demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand.

The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled in May 2011. Accumulated interest under the promissory notes amounted to $23,919.

In March 2011, the Company received a purchase order for EIM licenses in the United Kingdom totaling approximately $6 million and received payment of approximately $7 million in May 2011, which includes VAT tax remittance. The EIM license agreement expands services provided to an existing customer and the revenue will be recognized over the term of the three-year license and service agreement. The license agreement does contain a termination clause which enables the customer to cancel the agreement after two years of service and return 80% of the unearned prepaid license fee. The maximum prepaid fee which could be claimed is approximately $1.5 million. The Company believes that this source of liquidity along with the cash on hand, and anticipated increased cash generated from future operating activities will be sufficient to support its operations over the next twelve months.

NOTE 5: New Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement Topic 820, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends the definition of fair value measurement principles and disclosure requirements to eliminate differences between GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3 measurement disclosures, as well as transfers between Level 1 and Level 2 of the fair value hierarchy. As this update impacts disclosures only, the Company’s adoption of this guidance on January 1, 2012 did not impact the Company’s financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Topic 220, Presentation of Comprehensive Income, which requires companies to include a statement of comprehensive income as part of its interim and annual financial statements. The new guidance gives companies the option to present net income and comprehensive income either in one continuous statement or in two separate but consecutive statements. This approach represents a change from prior GAAP, which allowed companies to report other comprehensive income (“OCI”) and its components in the statement of shareholders’ equity. The guidance also allows companies to present OCI either net of tax with details in the notes or shown gross of tax (with tax effects shown parenthetically). The Company’s disclosure of comprehensive income for the three and nine months ended September 30, 2012 and 2011 is presented in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss) in this Form 10-Q. Under the new guidance, certain information included in the Condensed Consolidated Statements of Shareholders’ Equity would be shown in the new statement of comprehensive income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning January 1, 2012 and should be applied retrospectively. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income. This Update defers changes in Update 2011-05 that relate to how, when, and where reclassification adjustments are presented. The amendments are being made to allow the Board time to deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and the other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update. Public entities should apply these requirements for fiscal years, and interim periods

within those years, beginning after December 15, 2011. The new guidance impacts presentation only and the Company’s adoption of this guidance on January 1, 2012 did not have an impact on its financial position, results of operations, or cash flows.

In September 2011, the FASB issued ASU No. 2011-08, Topic 350, Testing of Goodwill for Impairment, which allows companies to assess qualitative factors to determine whether they need to perform the two-step quantitative goodwill impairment test. Under the option, an entity no longer would be required to calculate the fair value of a reporting unit unless it determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU may change how a company tests goodwill for impairment but should not change the timing or measurement of goodwill impairments. The ASU is effective for fiscal years beginning after December 15, 2011. The Company performed its annual goodwill impairment test as of October 31, 2011. The Company’s adoption of this guidance on January 1, 2012 has not had an impact on its results of operations, financial position, or cash flows.

In December 2011, the FASB issued ASU No. 2011-11, Topic 210, Disclosures about Offsetting Assets and Liabilities. This update is intended to improve the comparability of statements of financial position prepared in accordance with U.S. GAAP and IFRS, requiring both gross and net presentation of offsetting assets and liabilities. The new requirements are effective for fiscal years beginning on or after January 1, 2013, and for interim periods within those fiscal years. As this guidance only affects disclosures, the adoption of this standard will not have an impact on the Company’s results of operations, financial position, or cash flows.

NOTE 6: Basic and Diluted Net Income Per Common Share

Basic earnings per share amounts are computed by dividing reported earnings available to common stockholders by the weighted average shares outstanding for the period. Diluted earnings per share amounts are computed by dividing reported earnings available to common stockholders by weighted average common shares outstanding for the period giving effect to securities considered to be potentially dilutive common shares, such as stock options.


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012		2011			2012		2011
Net income / (loss)	$	165,399	$	(178,838	)	$	548,952	$	(803,052	)

Weighted average shares of common stock outstanding used to compute basic earnings per share		29,038,021		29,038,021			29,038,021		29,038,021
Additional common shares to be issued assuming exercise of stock options and stock warrants		833,545		—			837,642		—

Weighted average shares of common and common equivalent stock outstanding used to compute diluted earnings per share		29,871,566		29,038,021			29,875,663		29,038,021

Basic:
Net income / (loss) per share	$	0.01	$	(0.01	)	$	0.02	$	(0.03	)

Weighted average common shares outstanding		29,038,021		29,038,021			29,038,021		29,038,021

Diluted:
Net income / (loss) per share	$	0.01	$	(0.01	)	$	0.02	$	(0.03	)

Weighted average common and common equivalent shares outstanding		29,871,566		29,038,021			29,875,663		29,038,021

For the three and nine months ended September 30, 2011, outstanding stock options were excluded from weighted average shares of common and common equivalent shares outstanding due to their anti-dilutive effect as a result of the Company’s net loss.

Note 7: Stock Based Compensation

The Company’s Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provides for the issuance of incentive and nonqualified stock options to purchase, and restricted stock grants of, shares of the Company’s Class A common stock. Individuals eligible for participation in the Plan included designated officers and other employees (including employees who also serve as directors), non-employee directors, independent contractors and consultants who perform services for the Company. The terms of each grant under the Plan were determined by the board of

directors, or a committee of the board administering the Plan, in accordance with the terms of the Plan. Outstanding stock options become immediately exercisable upon a change of control of the Company as in accordance with the terms of the Plan. Stock options granted under the Plan typically become exercisable over a one to five year period. Generally, the options have various vesting periods, which include immediate and term vesting periods.

In 2002, the Company’s stockholders authorized an additional 2,000,000 shares available for grant under the Plan. In addition, the Company filed a registration statement on Form S-8 with the SEC. Such registration statement also covered certain options granted prior to the merger in 2001, which were not granted under the Plan (“Outside Plan Stock Options”).

On December 8, 2005, the Company’s stockholders ratified the CTI Group (Holdings) Inc. Stock Incentive Plan (the “Stock Incentive Plan”) at the Company’s 2005 Annual Meeting of Stockholders. In addition, the Company filed a registration statement on Form S-8 with the SEC. The Stock Incentive Plan replaced the Plan. No new grants will be granted under the Plan. Grants that were made under the Plan prior to the stockholders’ approval of the Stock Incentive Plan will continue to be administered under the Plan.

The Stock Incentive Plan is administered by the Compensation Committee of the board of directors. Under the Stock Incentive Plan, the Compensation Committee is authorized to grant awards to non-employee directors, executive officers and other employees of, and consultants and advisors to, the Company or any of its subsidiaries and to determine the number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. In addition, the Compensation Committee has the power to interpret the Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the Stock Incentive Plan.

The following types of awards or any combination of awards may be granted under the Stock Incentive Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, and (iv) performance awards.

The maximum number of shares of Class A common stock with respect to which awards may be granted to any individual participant under the Stock Incentive Plan during each of the Company’s fiscal years will not exceed 1,500,000 shares of Class A common stock, subject to certain adjustments described in the Stock Incentive Plan.

The aggregate number of shares of Class A common stock that are reserved for awards, including shares of Class A common stock underlying stock options, to be granted under the Stock Incentive Plan is 6,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. As of September 30, 2012, there were 2,089,900 awards available for grant under the Stock Incentive Plan. If any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No stock option granted under the Stock Incentive Plan will be exercisable later than ten years after the date it is granted.

At September 30, 2012, there were options to purchase 5,416,350 shares of Class A common stock outstanding consisting of 5,166,350 Plan and Stock Incentive Plan options and 250,000 Outside Plan Stock Options. There were exercisable options to purchase an aggregate of 4,316,304 shares of Class A common stock under the Plan and Stock Incentive Plan and options to purchase 250,000 shares of Class A common stock that were Outside Plan Stock Options as of September 30, 2012.

Information with respect to options was as follows:


	Options Shares			Exercise Price Range Per Share		Weighted Average Exercise Price
Outstanding, January 1, 2012		5,155,350		$	0.08 - $0.49	$	0.26
Granted		605,000		$	0.225 - $0.2475	$	0.2376
Exercised		—			—		—
Expired		(344,000	)	$	0.10 - $ 0.49	$	0.306

Outstanding, September 30, 2012		5,416,350		$	0.08 - $ 0.40	$	0.256

The future compensation costs related to non-vested options at September 30, 2012 is $117,325. The future costs will be recognized over the weighted average period of approximately 2.75 years.

The following table summarizes options exercisable at September 30, 2012:


	Option Shares		Exercise Price Range Per Share		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Remaining Contractual Term
September 30, 2012		4,566,300	$	0.08-$0.40	$	0.267	$	178,978		4.63 years

The following table summarizes non-vested options:


	Option Shares
January 1, 2012		665,748
Granted		605,000
Expired		(21,001	)
Vested		(399,697	)

September 30, 2012		850,050

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula) that uses the assumptions noted in the following table:


	2012
Risk-free interest rate		0.39	%
Dividend yield		0.00	%
Volatility factor		238.84	%
Expected lives		5 years
Expected forfeiture rate		15.05	%

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula). Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from general practices used by other companies in the software industry and estimates by the Company of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

On February 16, 2007, the Company and Fairford Holdings Scandinavia AB (“Fairford Scandinavia”), a wholly-owned subsidiary of Fairford, entered into the Securities Purchase Agreement (the “Agreement”), dated February 16, 2007. Pursuant to the Agreement, on February 16, 2007, the Company issued to Fairford Scandinavia a Class A common stock Purchase Warrant (the “Original Warrant”) to purchase shares of Class A common stock of the Company in consideration for securing the issuance of a $2.6 million letter of credit (the “Letter of Credit”) from SEB Bank to National City Bank. Due to National City Bank’s receipt of the Letter of Credit, the Company was able to obtain the loan at a favorable cash-backed interest rate. Effective April 14, 2008, the Company entered into a new Securities Purchase Agreement with Fairford Scandinavia and issued an additional warrant to Fairford Scandinavia to purchase shares of Class A common stock based on the interest rate savings (the “Additional Warrant”).

Pursuant to the Original Warrant, Fairford Scandinavia is entitled to purchase 419,495 shares of Class A common stock at the exercise price of $0.34 per share, subject to adjustments as described in the Original Warrant, at any time prior to the 10th anniversary of the date of issuance. Pursuant to the Additional Warrant, Fairford Scandinavia is entitled to purchase 620,675 shares of Class A common stock at the exercise price of $0.22 per share, subject to adjustments as described in the Additional Warrant, at any time prior to the 10th anniversary of the date of issuance. On December 31, 2009, Fairford Scandinavia sold all of its owned Class A shares, or 355,099 shares to Fairford for SEK 2.80362 ($0.39) per share. As of September 30, 2012, Fairford beneficially owned 0.7% of the Company’s outstanding Class A common stock and Fairford Scandinavia owned warrants to purchase 1,040,170 shares of the Company’s Class A common stock. Mr. Osseiran, the majority holder of the Company’s Class A common stock and a director of the Company, is a director of Fairford, the President of Fairford Scandinavia and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is a director of Fairford and the Chairman of Fairford Scandinavia. The Original Warrant and Additional Warrant vested immediately upon grant.

Included within selling, general and administrative expense for the three months ended September 30, 2012 and September 30, 2011 was $19,065 and $10,152, respectively, of stock-based compensation. Included within selling, general and administrative expense for the nine months ended September 30, 2012 and September 30, 2011 was $39,227 and $28,909, respectively, of stock-based compensation. Stock-based compensation expenses are recorded in the Corporate Allocation segment as these amounts are not included in internal measures of segment operating performance.

NOTE 8: Indemnification to Customers

The Company’s agreements with customers generally require the Company to indemnify the customer against claims that the Company’s software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard provisions including our right to replace the infringing product. As of September 30, 2012, the Company did not experience any material losses related to these indemnification obligations and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations, and consequently, the Company has not established any related accruals.

NOTE 9: Contingencies

The Company is, from time to time, subject to claims and administrative proceedings in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and administrative proceedings will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

NOTE 10: Income Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. As of September 30, 2012, the Company’s valuation allowance related only to net deferred tax assets in the United States and a true-up of prior year tax estimates in the United Kingdom related to larger R&D expenditure relief and capital allowance deductions than previously anticipated.

The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. As of September 30, 2012 and September 30, 2011, the Company had $115,742 and $92,354 of unrecognized tax benefits, respectively, all of which would favorably affect the Company’s effective tax rate if recognized. The Company and its subsidiaries are subject to U.S. federal and state income taxes as well as foreign income tax in the United Kingdom. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had no amounts accrued for interest and penalties as of September 30, 2012.

For the nine months ended September 30, 2012 and September 30, 2011, the Company had $277,780 and $161,504, respectively, of income tax expense and for the three months ended September 30, 2012, the Company had a tax benefit of $(1,993) compared to a tax expense of $17,518 for the three months ended September 30, 2011. The income tax benefit and expense were primarily related to the United Kingdom operations. The difference between the statutory rate and the actual rate is primarily due to the valuation allowance related to the net deferred tax assets in the United States.

NOTE 11: Segment Information

The Company has two reportable segments: EIM and CAMRA. These segments are managed separately because the services provided by each segment require different technology and marketing strategies.

For the three and nine months ended September 30, 2011, the Company had previously identified four reportable segments. Due to changes in the products and strategy, the Company has changed the way it views its segments and has reduced the number of segments to two. As the Company’s VoIP products evolved, the Company merged the former VoIP segment and Telemanagement segment. The Company believes that the market for these former segments has merged the product offerings. In 2012, the Company no longer viewed these as separate segments and therefore shared the resources to develop and market these products into the CAMRA segment. The Company shares distribution channels, marketing, sales and research and development resources within the segment. Patent enforcement involved the licensing, protection, enforcement and defense of the Company’s intellectual property and rights. In 2012, the Company determined to no longer show patent enforcement as a business segment as it had become immaterial due to a shift away from the marketing approach to patent enforcement activities as a business strategy. Segment information for the three and nine months ended September 30, 2011 has been reclassified for comparative purposes.

Electronic Invoice Management: EIM designs, develops and provides electronic invoice presentment and analysis software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. The Company provided these services primarily through facilities located in Indianapolis, Indiana and Blackburn, United Kingdom.

Call Accounting Management and Recording: CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase the CAMRA products when upgrading or acquiring a new enterprise communications platform.

Reconciling items for operating income (loss) in the table below represent corporate expenses, legal costs for patent enforcement and depreciation all of which are in the United States.

The accounting policies for segment reporting are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Summarized financial information concerning the Company’s reportable segments for the nine and three months ended September 30, 2012 and 2011 is shown in the following tables.


	For Nine Months Ended September 30, 2012
	Electronic Invoice Management		Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	8,783,578	$	3,990,788		$	—		$	12,774,366
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		7,178,913		2,347,138			—			9,526,051
Depreciation and amortization		1,036,029		319,169			3,189			1,358,387
Income (loss) from operations		2,424,150		(818,478	)		(784,926	)		820,746
Long-lived assets		5,822,389		913,123			15,164			6,750,676

	For Nine Months Ended September 30, 2011
	Electronic Invoice Management		Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	7,576,585	$	4,919,036		$	—		$	12,495,621
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		6,179,671		2,852,287			—			9,031,958
Depreciation and amortization		1,084,686		360,141			7,301			1,452,128
Income (loss) from operations		1,049,499		(916,734	)		(751,421	)		(618,656	)
Long-lived assets		7,058,234		733,344			5,080			7,796,658

	For Three Months Ended September 30, 2012
	Electronic Invoice Management		Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	2,718,053	$	1,232,662		$	—		$	3,950,715
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		2,244,775		759,914			—			3,004,689
Depreciation and amortization		352,919		107,495			1,087			461,501
Income (loss) from operations		639,778		(248,620	)		(227,715	)		163,443
Long-lived assets		5,822,389		913,123			15,164			6,750,676

	For Three Months Ended September 30, 2011
	Electronic Invoice Management		Call Accounting Management and Recording			Corporate Allocation			Consolidated
Revenues	$	2,717,582	$	1,661,083		$	—		$	4,378,665
Gross profit (loss) Revenues less cost of products, excluding depreciation and amortization		2,233,300		1,055,704			—			3,289,004
Depreciation and amortization		381,784		120,639			2,364			504,787
Income (loss) from operations		429,310		(324,845	)		(262,679	)		(158,214	)
Long-lived assets		7,058,234		733,344			5,080			7,796,658

The following table presents net revenues by geographic location.


	For Nine Months Ended September 30, 2012
	United States			United Kingdom		Consolidated
Revenues	$	2,600,483		$	10,173,883	$	12,774,366
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		1,797,974			7,728,077		9,526,051
Depreciation and amortization		324,855			1,033,532		1,358,387
Income (loss) from operations		(1,229,728	)		2,050,474		820,746
Long-lived assets		5,790,458			960,218		6,750,676

	For Nine Months Ended September 30, 2011
	United States			United Kingdom		Consolidated
Revenues	$	3,003,646		$	9,491,975	$	12,495,621
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		2,182,999			6,848,959		9,031,958
Depreciation and amortization		383,867			1,068,261		1,452,128
Income (loss) from operations		(1,260,181	)		641,525		(618,656	)
Long-lived assets		6,274,031			1,522,627		7,796,658

	For Three Months Ended September 30, 2012
	United States			United Kingdom		Consolidated
Revenues	$	780,044		$	3,170,671	$	3,950,715
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		593,259			2,411,430		3,004,689
Depreciation and amortization		108,791			352,710		461,501
Income (loss) from operations		(371,234	)		534,677		163,443
Long-lived assets		5,790,458			960,218		6,750,676

	For Three Months Ended September 30, 2011
	United States			United Kingdom		Consolidated
Revenues	$	1,076,382		$	3,302,283	$	4,378,665
Gross profit (Revenues less cost of products, excluding depreciation and amortization)		798,215			2,490,789		3,289,004
Depreciation and amortization		127,375			377,412		504,787
Income (loss) from operations		(487,473	)		329,259		(158,214	)
Long-lived assets		6,274,031			1,522,627		7,796,658

NOTE 12 –Related Party Transactions

On December 31, 2010, the PNC Loan Agreement matured. The Loan Agreement allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. At December 31, 2010 outstanding principal under the Loan Agreement amounted to $825,000. On January 3, 2011, in order to supplement the Company’s liquidity, Fairford advanced $825,000 to the Company which enabled the Company to repay the revolving loan facility with PNC. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of the demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The advances from the shareholder, Fairford, totaling $1,325,000, documented in the form of two demand promissory notes, were repaid and cancelled in May 2011. Accumulated interest paid under the promissory notes amounted to $23,919.

NOTE 13 – Subsequent Event

On October 23, 2012, the Company’s wholly owned subsidiary, CTI Billing Solutions Limited, as lessee, and Canal and River Trust, as lessor, executed a three year lease agreement, pursuant to which the Company renewed and extended its lease of office space in Blackburn, UK. The lease is for 9,360 square feet of office space at a per annum rate of ₤76,850 (approximately $123,000) per year; however, no rent is to be charged for the first 3 months of 2012. The average annual rate, considering the free rent period, for the full term equates to approximately $113,000. The lease term commenced retroactively on January 1, 2012 and terminates on December 31, 2014. In connection with the lease, the lessor agreed to reimburse the Company an amount of up to £25,000 in leasehold improvements and agreed to exclude such improvements from dilapidation repair considerations.

On October 29, 2012, the Company’s wholly owned subsidiary, CTI Data Solutions Limited, as lessee, and Spherion Technology (UK) Limited, as lessor, executed an amendment to its office space in London, UK whereby leased office space was reduced from 3,485 square feet to 2,323 square feet and annual lease reduced from £44,993 per annum to £33,683 per annum. The amended lease expires December 31, 2013. The average annual rate for the full term equates to approximately $54,000.

The Company leases 15,931 square feet of office space in Indianapolis for an average of $257,643 per year. The Indianapolis lease expires in February 2014.

There is no material relationship between the Company and lessors, other than in connection with the lease. The Company believes the leased office space is adequate for the Company’s operating needs.

All dollar amounts assume a conversion rate of $1.60 to one British pound. Actual dollar amounts may differ at time of payment.

The lease agreements also include various representations and covenants which are customary for transactions of this nature.

The Company leases its office facilities and certain equipment under long-term operating leases, which expire at various dates. Aggregate minimum annual rent for the five-years ended December 31, 2016 and thereafter, subject to applicable escalation clauses, are as follows:

Year ending December 31:


2012	$	461,121
2013		478,256
2014		181,923
2015		9,358
2016		780
Thereafter		—

Total	$	1,131,438

The Company filed a lawsuit for patent infringement under 35 U.S.C. §271 et seq., against BellSouth Corporation (“BellSouth”), Citizens Communications, Inc., Convergys Corporation, Mid America Computer Corporation, Qwest, Telephone Data Systems, Inc. and Traq-Wireless, Inc. in the United States District Court for the Southern District of Indiana on January 12, 2004. The lawsuit seeks treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270.

The Company settled with defendants Telephone Data Systems, Inc., Traq-Wireless, Inc., BellSouth Corporation and Convergys Corporation independently and dismissed those companies from the case. The Company also dismissed its complaint against Mid America Computer Corporation and Citizens Communications, Inc.

The Company amended its complaint to substitute Qwest Corporation and Qwest Communications International, Inc. as defendants instead of Qwest.

On October 15, 2012, the district court granted Qwest’s motion for summary judgment of non-infringement and entered judgment requiring each side to bear its own litigation costs. Qwest filed a motion to amend the judgment on October 23, 2012, which requested that it be awarded its costs incurred prior to November 17, 2009. On October 30, 2012, the district court granted Qwest’s motion for reconsideration, and amended its judgment to award Qwest costs in the amount of $251,245.91. The Company and its counsel believe that the award of costs of $251,245.91 is premature and believes that the Company will be successful on appeal in overturning the district court’s order granting Qwest’s motion for summary judgment, which will vitiate the award of costs. The Company has until November 28, 2012 to file its notice of appeal from the district court’s judgment. (See Part II; Item 1 – Legal Proceedings).

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company is comprised of two business segments: EIM and CAMRA. EIM designs, develops and provides electronic invoice presentment and analysis software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. The Company provides these services primarily through facilities located in Indianapolis, Indiana and Blackburn, United Kingdom. CAMRA designs, develops and provides software and services used by enterprise, governmental, institutional end users and managed and hosted customers of service providers to manage their telecommunications service and equipment usage and to analyze voice, video, and data usage, record and monitor communications and perform administrative and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase the CAMRA products when upgrading or acquiring a new enterprise communications platform.

In previous years, the Company had identified four business segments. Due to changes in the products and strategy, the Company has changed the way it views its segments and has reduced the number of segments to two. Prior period segment information was reclassified for comparative purposes.

The Company generates its revenues and cash from several sources: software sales, license fees, processing fees, implementation fees, and training and consulting services.

The Company’s software products and services are subject to changing technology and evolving customer needs which require the Company to continually invest in research and development in order to respond to such demands. The limited financial resources available to the Company require the Company to concentrate on those business segments and product lines which the Company believes will provide the greatest returns on investment. The EIM segment, as compared to the other business segment, provides the predominant share of income from operations and cash flow from operations. The majority of CAMRA segment revenues are derived from its United Kingdom operations but the Company believes that most of the growth in the CAMRA segment will occur in the United States.

The Company reported revenue in the EIM segment of $8.8 million and $7.6 million for the nine months ended September 30, 2012 and 2011, respectively, and $2.7 million and $2.7 million for the three months ended September 30, 2012 and 2011, respectively. For the CAMRA segment, the Company recorded revenues of $4.0 million and $4.9 million for the nine months ended September 30, 2012 and 2011, respectively, and $1.2 million and $1.7 million of the three months ended September 30, 2012 and 2011, respectively.

The Company believes that as voice and data services continue to commoditize, service providers will seek alternative business models to replace revenue lost as a result of pricing pressures. One such business model is the delivery of managed or hosted voice and video services.

Traditionally, organizations that required advanced voice and video services would purchase enabling communications hardware and software, operate and maintain this equipment, and depreciate the associated capital expense over time. This approach had two major disadvantages for such organizations. The first being that organizations would experience significant capital and operational expenditures related to acquiring these advanced services. The second being that the capabilities of the acquired equipment would not materially improve as voice and video service technology evolved.

Service providers recognized these challenges and began, as part of their next generation network (“NGN”) strategies, to deliver managed and hosted service offerings that do not require the customer to purchase expensive equipment up-front and virtually eliminate the operational expenditures associated with managing and maintaining an enterprise-grade communications network. Service providers incrementally improve revenue by enabling competitive voice and video features while reducing costs by delivering these services on high-capacity, low-cost NGNs.

Due to the profitability and average revenue per user advantage possible by delivering such managed and hosted service offerings, providers not only look at acquiring new customers but converting legacy customers onto the NGN platform. The Company believes that this conversion process is significant. Many legacy features and functions are not available on NGN platforms, primarily due to the immaturity of the service delivery model.

The Company’s CAMRA applications will help eliminate customer resistance to conversion to next generation platforms, while creating new revenue opportunities for service providers through the delivery of compelling value added services. In 2007, the Company marketed two applications, emPulse, a web-based communications traffic

analysis solution, and SmartRecord^® IP, which enable service providers to selectively intercept communications on behalf of their hosted and managed service customers. These applications also enable managed and hosted service customers of service providers to analyze voice, video, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications were released as enterprise-grade products. The Company anticipates that customers will purchase these products when upgrading or acquiring a new enterprise communications platform. The Company has taken the business benefits of these enterprise-grade applications and has delivered provider-grade managed and hosted service applications, enabling service providers to create a new recurring revenue stream, while ensuring that enterprise customers have the tools necessary and relevant to their particular line of business or vertical.

Financial Condition

In the nine months ended September 30, 2012, the stockholders’ equity increased $489,181 from $4,725,044 as of December 31, 2011 to $5,214,225 as of September 30, 2012 primarily as a result of the nine months ended September 30, 2012 net income of $548,952, partially off-set by other comprehensive loss of $98,998. The Company realized a decrease in net current assets (current assets, less current liabilities) of $821,101 which was primarily attributable to a decrease in cash and accounts receivable in the nine months ended September 30, 2012.

At September 30, 2012, cash and cash equivalents were $2,654,157 compared to $2,945,182 at December 31, 2011, and such decrease was primarily attributable to cash used in investing activities of $827,787 partially off-set by cash provided by operating activities of $423,315. Cash provided by operating activities in the nine months ended September 30, 2012 amounted to $423,315 which was primarily related to net income of $548,952 along with depreciation and amortization of $1,358,387 and a decrease in receivables of $828,661 which was partially offset by a decrease in deferred revenue of $2,399,401. Cash utilized in investing activities of $827,787 related to additions to property, equipment and software. The Company generates approximately 79.6% of its revenues from operations in the United Kingdom where the functional currency, the United Kingdom pound, has strengthened by 4.3% in relation to the United States dollar during the nine month period ended September 30, 2012.

In October 2010, in order to supplement the Company’s liquidity, Fairford advanced to the Company $500,000. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand. Principal and interest outstanding under the Company’s revolving loan facility matured on December 30, 2010. The revolving loan facility, however, allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. Outstanding principal under the revolving loan facility amounted to $825,000 on December 30, 2010. On January 3, 2011, in order to supplement the Company’s liquidity which enabled the Company to repay the revolving loan facility with PNC, Fairford advanced to the Company $825,000. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand. The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled on May 10, 2011. Accumulated interest paid under the promissory notes amounted to $23,919.

Results of Operations (Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011)

Revenues

Revenues from operations for the nine months ended September 30, 2012 increased $278,745, or 2.2%, to $12,774,366 as compared to $12,495,621 for the nine months ended September 30, 2011. Overall revenues increased primarily as a result of increased sales in EIM segment. Revenues derived from the United Kingdom operations represented 79.6% and 76.0% of total revenues for the nine months ended September 30, 2012 and 2011, respectively. The increase in United Kingdom revenues was primarily related to increased sales in the United Kingdom EIM segment due to new customers acquired during 2011. The United States revenues decreased by $403,163, or 13.4%, to $2,600,483 for the nine months ended September 30, 2012 compared to $3,003,646 for the nine months ended September 30, 2011. Such decrease was primarily related to a decrease in revenue in the EIM segment sales in the United States. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 24.6% of the total revenues for the nine months ended September 30, 2012 and approximately 25.7% for the nine months ended September 30, 2011.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the nine months ended September 30, 2012, decreased $215,348, or 6.2%, to $3,248,315 as compared to $3,463,663 for the nine months ended September 30, 2011. The decrease was primarily related to cost reductions undertaken in 2011 in the United Kingdom related to the CAMRA segment. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment decreased $423,099 to $1,643,650 for the nine months ended September 30, 2012 from $2,066,749 for the nine months ended September 30, 2011. The costs of products and services, excluding depreciation and amortization, related to the EIM segment increased by $207,751 to $1,604,665 for the nine months ended September 30, 2012 compared to $1,396,914 for the nine months ended September 30, 2011. The cost of products and services, excluding depreciation and amortization, was 25.4% of revenue for the nine months ended September 30, 2012, as compared to 27.7% of revenue for the nine months ended September 30, 2011. The decrease in percentage is related to the cost reductions in the United Kingdom along with the increase in revenue with a relatively fixed cost structure.

Patent License Fee and Enforcement Cost

The Company no longer views Patent Enforcement as a segment. The legal costs associated with Patent Enforcement are now classified as Selling, General and Administrative Costs. For comparative purposes the Company reclassified the $54,531 credit related to Patent License Fee and Enforcement Cost for the nine months ended September 30, 2011.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the nine months ended September 30, 2012 decreased $994,214, or 15.9%, to $5,273,879 compared to $6,268,093 for the nine months ended September 30, 2011. The decrease was primarily due to cost reductions related to reductions in staff in the United States and the United Kingdom and leased space in the United Kingdom in 2011. Selling, general and administrative costs related to the CAMRA segment decreased by $558,488 to $1,988,309 for the nine months ended September 30, 2012 compared to $2,546,797 for the nine months ended September 30, 2011. Selling, general and administrative costs related to the EIM segment decreased by $473,343 to $2,503,833 for the nine months ended September 30, 2012 compared to $2,977,176 for the nine months ended September 30, 2011. Selling, general and administrative costs related to the Corporate allocation increased by $37,617 to $781,737 for the nine months ended September 30, 2012 compared to $744,120 for the nine months ended September 30, 2011.

Research and Development Expense

Research and development expense for the nine months ended September 30, 2012 increased $142,646, or 7.4%, to $2,073,039 as compared to $1,930,393 for the nine months ended September 30, 2011. Research and development costs related to the CAMRA segment decreased $3,945 to $858,138 for the nine months ended September 30, 2012 compared to $862,083 for the nine months ended September 30, 2011. Research and development expense related to the EIM segment increased $146,591 to $1,214,901 for the nine months ended September 30, 2012 compared to $1,068,310 for the nine months ended September 30, 2011. Research and development costs that were capitalized during the nine months ended September 30, 2012 and September 30, 2011 amounted to $607,628 and $399,578, respectively. Research and development costs allocated to cost of goods sold during the nine months ended September 30, 2012 and September 30, 2011 amounted to $557,732 and $951,488, respectively.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2012 decreased $93,741 to $1,358,387 from $1,452,128 in the nine months ended September 30, 2011.

Other Income and Expense

The Company realized interest income of $6,230 for the nine months ended September 30, 2012 compared to an interest expense of $23,886 for the nine months ended September 30, 2011. The change in interest was primarily associated with interest earned on cash and cash equivalents as well as the payoff of promissory note indebtedness in 2011.

The Company realized other expense of $244 for the nine months ended September 30, 2012 and other income of $994 for the nine months ended September 30, 2011.

Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes that it is more likely than not that the asset will not be realized. As of September 30, 2012, the Company’s valuation allowance related to the net deferred tax assets in the United States.

The tax expense for the nine months ended September 30, 2012 and September 30, 2011 of $277,780 and $161,504, respectively, was due to the pre-tax income in the United Kingdom of $2,060,702 and $637,301, respectively.

Net Income / (Loss)

The Company realized net income for the nine months ended September 30, 2012 of $548,952 compared to a net loss of $803,052 for the nine months ended September 30, 2011. The change to net income was primarily associated with increased United Kingdom EIM revenues and benefits of the cost reductions implemented in 2011.

Results of Operations (Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011)

Revenues

Revenues from operations for the three months ended September 30, 2012 decreased $427,950, or 9.8%, to $3,950,715 as compared to $4,378,665 for the three months ended September 30, 2011. Overall revenues decreased primarily as a result of decreased sales in the CAMRA segment. Revenues derived from the United Kingdom operations represented 80.3% and 75.4% of total revenues for the three months ended September 30, 2012 and 2011, respectively. The increase in United Kingdom revenues was primarily related to decreased sales in the United States EIM segment due to decreased revenue from the United States largest EIM customer. The United States revenues decreased by $296,338, or 27.5%, to $780,044 for the three months ended September 30, 2012 compared to $1,076,382 for the three months ended September 30, 2011. Such decrease was primarily related to a decrease in revenue in the EIM segment sales in the United States. The Company earns a substantial portion of its revenue from a single EIM customer in the United Kingdom. That customer represented approximately 25.8% of the total revenues for the three months ended September 30, 2012 and approximately 25.3% for the three months ended September 30, 2011.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the three months ended September 30, 2012, decreased $143,635, or 13.2%, to $946,026, as compared to $1,089,661 for the three months ended September 30, 2011. The decrease was primarily related to costs associated with decreased revenue and cost reductions undertaken in 2011 in the United Kingdom related to the CAMRA segment. The cost of products and services, excluding depreciation and amortization, related to the CAMRA segment decreased $132,631 to $472,748 for the three months ended September 30, 2012 from $605,379 for the three months ended September 30, 2011. The costs of products and services, excluding depreciation and amortization, related to the EIM segment decreased by $11,004 to $473,278 for the three months ended September 30, 2012 compared to $484,282 for the three months ended September 30, 2011. The cost of products and services, excluding depreciation and amortization, was 23.9% of revenue for the three months ended September 30, 2012, as compared to 24.9% of revenue for the three months ended September 30, 2011. The decrease in percentage is related to the cost reductions in the United Kingdom CAMRA segment.

Patent License Fee and Enforcement Cost

The Company no longer views Patent Enforcement as a segment. The legal costs associated with Patent Enforcement are now classified as Selling, General and Administrative Costs. For comparative purposes the Company reclassified the cost of $3,775 related to Patent License Fee and Enforcement Cost for the three months ended September 30, 2011.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended September 30, 2012 decreased $671,280, or 28.9%, to $1,653,245 compared to $2,324,525 for the three months ended September 30, 2011. The decrease was primarily due to cost reductions related to reductions in staff in the United States and the United Kingdom and leased space in the United Kingdom in 2011. Selling, general and administrative costs related to the CAMRA segment decreased by $266,564 to $631,217 for the three months ended September 30, 2012 compared to $897,781 for the three months ended September 30, 2011. Selling, general and administrative costs related to the EIM segment decreased by $316,498 to $795,400 for the three months ended September 30, 2012 compared to $1,111,898 for the three months

ended September 30, 2011. Selling, general and administrative costs related to the Corporate allocation decreased by $88,218 to $226,628 for the three months ended September 30, 2012 compared to $314,846 for the three months ended September 30, 2011.

Research and Development Expense

Research and development expense for the three months ended September 30, 2012 increased $108,594, or 17.6%, to $726,500 as compared to $617,906 for the three months ended September 30, 2011. Research and development costs related to the CAMRA segment decreased $37,776 to $269,822 for the three months ended September 30, 2012 compared to $307,598 for the three months ended September 30, 2011. Research and development expense related to the EIM segment increased $146,370 to $456,678 for the three months ended September 30, 2012 compared to $310,308 for the three months ended September 30, 2011. Research and development costs that were capitalized during the three months ended September 30, 2012 and September 30, 2011 amounted to $219,485 and $76,605, respectively. Research and development costs allocated to cost of goods sold during the three months ended September 30, 2012 and September 30, 2011 amounted to $115,559 and $507,708, respectively.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2012 decreased $43,286 to $461,501 from $504,787 in the three months ended September 30, 2011.

Other Income and Expense

The Company realized interest income of $207 for the three months ended September 30, 2012 compared to an interest expense of $4,100 for the three months ended September 30, 2011. The change in interest was primarily associated with a payoff of all debt in 2011 and the Company having cash earning interest in 2012.

The Company realized other expense of 244 for the three months ended September 30, 2012 and other income of $994 for the three months ended September 30, 2011.

Taxes

The tax benefit for the three months ended September 30, 2012 of $1,993 and tax expense for the three months ended September 30, 2011 of $17,518, were due to the pre-tax income in the United Kingdom of $534,640 and $325,952, respectively. The benefit was cause by a true-up of the prior year provision and the decrease in the United Kingdom statutory tax rates to 24% as of September 30, 2012 compared to 28% as of September 30, 2011.

Net Income / (Loss)

The Company realized net income for the three months ended September 30, 2012 of $165,399 compared to a net loss of $178,838 for the three months ended September 30, 2011. The change to net income was primarily associated with the realization of cost reductions implemented in 2011.

Liquidity and Capital Resources

Historically, the Company’s principal needs for funds have been for operating activities (including costs of products and services, patent enforcement activities, selling, general and administrative expenses, research and development, and working capital needs) and capital expenditures, including software development. Cash flows from operations and existing cash and cash equivalents have been adequate to meet the Company’s business objectives. Cash and cash equivalents decreased $291,025 to $2,654,157 as of September 30, 2012 compared to $2,945,182 as of December 31, 2011. The decrease in cash and cash equivalents, during the nine months ended September 30, 2012 was predominately related to cash spent on property, equipment, and software of $827,787 partially off-set by cash flows provided by operations of $423,315. The effect of foreign currency exchange rates on cash and cash equivalents was a gain of $113,447.

Cash is generated from (or utilized in) the income/(loss) from operations for each segment (see Note 11 to the Consolidated Financial Statements (unaudited) of Part I, Item 1 of this Form 10-Q). The EIM and CAMRA segments represented income / (loss) from operations for the nine months ended September 30, 2012 of $2,424,150 and $(818,478), respectively and for the three months ended September 30, 2012 of $639,778 and $(248,620), respectively. The Corporate Allocation expense was $(784,926) for the nine months ended September 30, 2012 and $(227,715) for the three months ended September 30, 2012. The United States location generated a loss from operations for the three and nine months ended September 30, 2012 of $(371,234) and $(1,229,728), respectively, which was primarily associated with losses generated in the CAMRA segment and the Corporate Allocations expense. The United Kingdom location generated income from operations for the same periods of $534,677 and $2,050,474, respectively.

On December 31, 2010, a revolving loan (the “Loan Agreement”) the Company had with PNC Bank (“PNC”) matured. The Loan Agreement allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. At December 31, 2010, the outstanding principal under the Loan Agreement amounted to $825,000. On January 3, 2011, in order to supplement the Company’s liquidity, Fairford advanced $825,000 to the Company which enabled the Company to repay the revolving loan facility with PNC. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of a demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand.

In March 2011, the Company received a purchase order for EIM licenses in the United Kingdom totaling approximately $6 million and received payment of approximately $7 million in May 2011, which included VAT tax remittance. The EIM license agreement expands services provided to an existing customer and the revenue will be recognized over the term of the three-year license and service agreement. The license agreement does contain a termination clause which enables the customer to cancel the agreement after two years of service and return 80% of the unearned prepaid license fee. The maximum prepaid fee which could be claimed is approximately $1.5 million. The Company believes that this source of liquidity along with the cash on hand, and anticipated increased cash generated from future operating activities will be sufficient to support its operations over the next twelve months.

The Company leases 15,931 square feet of office space in Indianapolis for an average of $257,643 per year. The Indianapolis lease expires in February 2014.

All dollar amounts assume a conversion rate of $1.60 to one British pound. Actual dollar amounts may differ at time of payment.

The lease agreements also include various representations and covenants which are customary for transactions of this nature.

Year ending December 31:


2012	$	461,121
2013		478,256
2014		181,923
2015		9,358
2016		780
Thereafter		—

Total	$	1,131,438

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, depreciation and amortization, investments, income taxes, capitalized software, goodwill, restructuring costs, accrued compensation, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. For the description of other critical accounting policies used by the Company, see Item 8. “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Income Taxes. The Company is required to estimate its income taxes. This process involves estimating the Company’s actual current tax obligations together with assessing differences resulting from different treatment of items for tax and accounting purposes which result in deferred income tax assets and liabilities.

The Company accounts for income taxes using the liability method. Under the liability method, a deferred tax asset or liability is determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences are expected to reverse.

The Company’s deferred tax assets are assessed for each reporting period as to whether it is more likely than not that they will be recovered from future taxable income, including assumptions regarding on-going tax planning strategies. To the extent the Company believes that recovery is uncertain, the Company has established a valuation allowance for assets not expected to be recovered. Changes to the valuation allowance are included as an expense or benefit within the tax provision in the statement of operations. As of September 30, 2012, the Company’s valuation allowance related only to net deferred tax assets in the United States. As a result, the Company’s tax expense relates to the United Kingdom operations and the Company does not anticipate recording significant tax charges or benefits related to operating gains or losses for the Company’s United States operations.

The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Indiana and foreign income tax in the United Kingdom. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at September 30, 2012.

The Company’s tax filings are subject periodically to regulatory review and audit.

Research and Development and Software Development Costs. Research and development costs are charged to operations as incurred. Software Development Costs are considered for capitalization when technological feasibility is established. The Company bases its determination of when technological feasibility is established based on the development team’s determination that the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications including, functions, features, and technical performance requirements.

Goodwill and Intangible Assets. The Company considers the goodwill and related intangible assets related to CTI Billing Solutions Limited to be the premium the Company paid for CTI Billing Solutions Limited. For accounting purposes, these assets are maintained at the corporate level and the Company considers the functional currency with respect to these assets as the United States dollar.

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. No impairment was identified in 2011. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of patents, purchased technology, trademarks and trade names, and customer lists.

The Company has allocated goodwill and a significant component of its intangible assets to CTI Billing Solutions Limited, as that entity is considered a separate reporting unit. The Company performed its annual impairment analysis on goodwill as of October 1, 2011, to coincide with the calendar date set in past years for this analysis. The Company’s analysis considered the projected cash flows of the reporting unit and gave consideration to appropriate factors in determining a discount rate to be applied to these cash flows. The results of this analysis indicated that there was no impairment as of the date of our annual impairment determination and that further impairment analysis was not required.

The Company’s Class A common stock price dropped significantly in the fourth quarter of 2008 and has remained at low levels. As of November 1, 2012, the Company’s Class A common stock closed at $0.21 per share and the “market cap” for the Company’s stock was approximately $6.1 million which was slightly higher than the Company’s reported book value at September 30, 2012 of approximately $5.2 million.

Because of the Company’s continued low “market cap”, the Company reviewed the assumptions utilized in the impairment determination and again found that there existed no impairment. The Company’s operations of the business unit are primarily based on recurring revenues and have not experienced an adverse change in anticipated performance considered in the impairment analysis. The business unit’s operating performance subsequent to the goodwill impairment analysis has exceeded anticipated performance through the most recent period that information is available. The Company believes that the year-end analysis is sufficiently current and no formal analysis has been performed at September 30, 2012.

The Company recognizes that the market for our stock can be below our book value which the Company attributes to a number of factors including very limited trading in the Company’s Class A common stock; a significant portion of the Company’s Class A common stock (approximately 67%) is beneficially owned by a majority stockholder, an overall “flight to quality” by investors in which many “penny stocks” such as CTI’s have been significantly downgraded in terms of pricing and an overall lack of public awareness of its operations. While the Company cannot quantify the impacts of these factors in terms of how they impact the difference between book value and our stock’s “market cap,” the Company does not believe that the market in its Class A common stock is sufficiently sophisticated to make a proper determination of the value of the Company’s Class A common stock such that it should drive the Company to reach a conclusion that impairment of its goodwill has occurred when the Company believes that generally accepted valuation techniques using its most recent assessments as to the future performance of our business indicate that it is not impaired. The Company will continue in the future to be aware of the market cap in our assessment of its goodwill and may more frequently update its analysis of goodwill impairment

in light of this situation. The Company believes the year-end analysis is sufficiently current and no formal analysis has been performed at September 30, 2012. If the Company assesses market condition changes in our business, it may be required to reflect additional goodwill impairment in the future.

Long-Lived Assets. The Company reviews the recoverability of the carrying value of its long-lived assets on an annual basis. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such events occur, the Company compares the carrying amount of the assets to the undiscounted expected future cash flows. If this comparison indicates there is impairment, the amount of the impairment is typically calculated using discounted expected future cash flows.

Revenue Recognition and Accounts Receivable Reserves. The Company records revenue when it is realized, or realizable, and earned. Revenues from software licenses are recognized upon shipment, delivery or customer acceptance, based on the substance of the arrangement or as defined in the sales agreement provided there are no significant remaining vendor obligations to be fulfilled and collectability is reasonably assured. Software sales revenue is generated from licensing software to new customers and from licensing additional users and new applications to existing customers.

The Company’s sales arrangements typically include services in addition to software. Service revenues are generated from support and maintenance, processing, training, consulting, and customization services. For sales arrangements that include bundled software and services, the Company accounts for any undelivered service offering as a separate element of a multiple-element arrangement. Amounts deferred for services are determined based upon vendor-specific objective evidence of the fair value of the elements. Support and maintenance revenues are recognized on a straight-line basis over the term of the agreement. Revenues from processing, training, consulting, and customization are recognized as provided to customers. If the services are essential to the functionality of the software, revenue from the software component is deferred until the essential service is complete.

If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the service element does not meet the criteria for separate accounting set forth in the guidance related to software revenue recognition. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with guidance related to contract accounting. The Company carefully evaluates the circumstances surrounding the implementations to determine whether the percentage-of-completion method or the completed-contract method should be used. Most implementations relate to the Company’s Telemanagement products and are completed in less than 30 days once the work begins. The Company uses the completed-contract method on contracts that will be completed within 30 days since it produces a result similar to the percentage-of-completion method. On contracts that will take over 30 days to complete, the Company uses the percentage-of-completion method of contract accounting.

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company continuously monitors collections and payments from its customers and the allowance for doubtful accounts is based on historical experience and any specific customer collection issues that the Company has identified. If the financial condition of its customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. Where an allowance for doubtful accounts has been established with respect to customer receivables, as payments are made on such receivables or if the customer goes out of business with no chance of collection, the allowances will decrease with a corresponding adjustment to accounts receivable as deemed appropriate.

Stock Based Compensation. The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant. The Company uses the Black-Scholes-Merton formula to calculate the fair value of the stock options.

The Company recognizes compensation cost net of a forfeiture rate and recognizes the compensation cost for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term. The Company estimated the forfeiture rate based on its historical experience and its expectations about future forfeitures.

The Company estimates it will recognize approximately $50,000, $45,000, $42,000 and $19,000 for the fiscal years ending December 31, 2012, 2013, 2014 and 2015, respectively, of compensation costs for non-vested stock options previously granted to employees.

New Accounting Pronouncements

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 4.

Controls and Procedures.

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, the principal executive officer and principal financial officer concluded that as of September 30, 2012, the Company’s disclosure controls and procedures were effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter covered by this report that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter covered by this Form 10-Q.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary, its procedures and controls.

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings.

The Company is from time to time subject to claims and administrative proceedings that are filed in the ordinary course of business and are unrelated to Patent Enforcement.

Qwest Corporation

The Company previously disclosed that on May 11, 2004, an action was brought against the Company in the United States District Court for the Western District of Washington by Qwest Corporation seeking a declaratory judgment of non-infringement and invalidity of the Company’s Patent No. 5,287,270. An amended complaint was filed on July 13, 2004 adding Qwest Communications Corporation to that action. The Company filed a motion with the United States District Court for the Western District of Washington seeking to dismiss that action or, in the alternative, to transfer it to the United States District Court for the Southern District of Indiana.

On November 12, 2004, the United States District Court for the Western District of Washington granted the Company’s motion to the extent of transferring the action to the United States District Court for the Southern District of Indiana. The Company asserted counterclaims alleging patent infringement and the United States District Court for the Southern District of Indiana then consolidated the transferred action with the pending patent infringement lawsuit previously disclosed under “BellSouth Corporation et al.”

On January 9, 2008, the United States District Court for the Southern District of Indiana issued its claim construction for U.S. Patent No. 5,287,270. On January 18, 2008, the Qwest entities filed a motion for stay and a summary judgment motion of invalidity based on the construction of one of the claim terms. The motions were fully briefed on an expedited basis and on February 26, 2008, the court denied the motions. Fact discovery closed on December 23, 2008. Expert discovery was completed on April 1, 2009. On April 15, 2009, the parties filed various summary judgment motions related to patent infringement and invalidity and immunity from suit concerning the Networx government contracts. On September 22, 2009, the Court granted the Qwest entities’ motion for summary judgment of immunity from suit concerning the Networx government contracts, thereby requiring the Company to sue the Government in the Court of Federal Claims. On October 29, 2009, the Court ruled on the parties’ patent invalidity and noninfringement summary judgment motions. The Court held that the Company’s U.S. Patent No. 5,287,270 was not invalid due to certain prior art but not infringed by the Qwest entities. In November 2009, the Company filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit (Federal Circuit). The Qwest entities subsequently cross appealed. Briefing before the Federal Circuit was completed, and, on January 20, 2011, the Federal Circuit reversed the district court’s decision. On February 22, 2011, the Qwest entities filed a Petition for a Rehearing en banc. The Federal Circuit denied the petition on April 25, 2011, and remanded the case to the district court. The district court subsequently allowed the parties to file new motions for summary judgment directed to infringement issues not presented to the Federal Circuit. The parties filed cross-motions for summary judgment on September 16, 2011, and completed the briefing process on November 21, 2011.

Item 1A – Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 which could materially affect the Company’s business, financial condition or future results. The risk factors in the Company’s Annual Report on Form 10-K have not materially changed.

The risks in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3 – Defaults Upon Senior Securities.

None.

Item 4 – Mine Safety Disclosure

Not applicable.

Item 5 – Other Information.

None.

Item 6 – Exhibits.


Exhibit 11.1		Statement re computation of per share earnings, incorporated by reference to Note 6 to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q

Exhibit 31.1	-	Chief Executive Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2	-	Chief Financial Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1	-	Section 1350 Certification of the Chief Executive Officer

Exhibit 32.2	-	Section 1350 Certification of the Chief Financial Officer

Exhibit 101	-	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for each of the three and nine months ended September 30, 2012 and 2011, (iii) Consolidated Statements of Cash Flows for each of the nine months ended September 30, 2012 and 2011, and (iv) Notes to Consolidated Financial Statements.*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


CTI Group (Holdings) Inc.

/s/ John Birbeck
John Birbeck						Date: November 14, 2012
Chief Executive Officer
(Principal Executive Officer)

/s/ Manfred Hanuschek
Manfred Hanuschek						Date: November 14, 2012
Chief Financial Officer
(Principal Financial Officer)

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